Disclaimer: the information provided here is not intended as financial product advice. Consult your financial adviser before acting on any information in this document. Always consult closely with Centrelink/DVA before altering asset-test exempt income streams. There are significant penalties for breaching the strict compliance conditions imposed on asset-test exempt income streams.

What happens when a lifetime pension expires?

Lifetime pensions are prescribed by the SIS Act under regulation 1.06(2). Asset-test exempt lifetime income streams are lifetime pensions that have been granted asset-test exemption under the provisions of the Social Security Act 1991, section 9A.

A lifetime pension normally will expire only after the death of the primary pensioner and any reversionary pensioners.

If the pension was established with a guaranteed minimum term under the provisions of SIS Reg 1.06(3), then, if the pensioner/s die before that term has expired, a lump-sum is payable either to a reversionary pensioner or to the pensioner's estate. The lump-sum will be equal to the remaining payments from the date of death to the end of the guaranteed term.

Any residual amount will then normally remain in an unallocated reserve in the fund. That reserve is under the control of the trustees but it does not belong to any member of the fund. Not even the member who was receiving the pension.

This particular feature of lifetime pensions is given effect by the following sub-regulation:

SIS Reg 1.06(2)(d) ... the pension does not have a residual capital value; ...

Accordingly, there are no further payments after the pension expires. This is what you would expect: after the promised pension payments have been made the contract is fulfilled and the trustees are not obliged to make any further payments.

The trustees can make allocations to members of the fund from the left-over reserve. The taxation treatment of those allocations is described by ITAR 1997 291-25.01. The provisions of that regulation are described here. Depending on its size it may take many years to exhaust that reserve or it may be possible to allocate all of it to fund members in one action.

Consider also that a lifetime pension can be commuted to a market-linked pension or the assets rolled-out of the fund to purchase a suitable annuity (SIS Reg 1.06(2)(e)(iii)).

If the pension is an asset-test exempt income stream be sure to consult with Centrelink/DVA before making changes or risk a hefty penalty.

The commutation value of lifetime pensions is described here.